Interest rates in Australia are tipped to fall even further after the central bank slashed the rate by half a percentage point to 3.75%, its lowest level since December 2009.
In announcing the larger than expected cut in the main interest rate the bank said inflation may be lower than anticipated over the next few years.
The Australian dollar fell half a cent and government bond yields hit 60-year lows.Markets had only looked for a quarter point easing.
Reserve Bank of Australia governor Glenn Stevens said inflation will probably be lower than earlier expected over the coming one to two years, but still in the 2-3% range.
Retail and manufacturing groups have been demanding large rate cuts since the start of the year, pointing to weak consumer confidence, low spending and the effects of the strong Australian dollar on non-mining industries.
Westpac senior economist James Shugg says more cuts might follow if further problems overseas persist.
"If the European story pans out as badly as we think it's going to, that also adds to the case for lower rates in Australia, given that the Australian economy is very much leveraged into the global growth story."
The central bank is now expected to cut forecasts for both economic growth and inflation in its quarterly statement on monetary policy, to be released on Friday.
The RBA has held rates since cuts last November and December, but recently adopted an easing bias as growth in the economy disappointed outside the booming mining sector.
A strong currency and intense foreign competition has pressured manufacturing and tourism, while a shift in spending habits by penny-pinching consumers has hit retailers hard.
One result has been a sharp slowdown in employment growth, though the jobless rate remains historically low at 5.2%.
Australia's banks are expected to pass some of this easing to their customers. Westpac and National Australia Bank say they are reviewing their rates.
Australian households are highly sensitive to mortgage rates as over a third have home loans, most of which are variable.
Mortgage debt totals around $A1.2 trillion, or 1.5 times household disposable income, and paying the annual interest on it takes almost a tenth of those earnings.
